There is a growing call for greater protection of Papua New Guinea industry to respond to allegedly unfair international competition. A number of manufacturers tell Business Advantage PNG that many countries have used protectionism to foster their domestic industries and they believe it is time for PNG to do the same.

Composition of PNG economy as percentage of GDP. Source: IMF

They also argue that selective subsidies or tariffs are necessary if the economy is to be diversified away from its over-dependence on the resources sector. It is a view echoed in the Asian Development Bank’s latest Outlook, which described diversification of the industry base as a ‘policy priority.’

Michael Kingston, Chief Executive of K K Kingston, points to strategically targeted protectionist interventions as the way forward (read his Opinion piece here). ‘I would use tariffs and other measures on a selective, targeted basis to protect industries in which PNG aspires to develop a comparative advantage.

Amongst the Oceania countries, PNG is the country that has the ‘highest number of tariff lines that are at zero.’

‘In particular, I would focus these efforts on products that are manufactured in PNG, and on agriculture. The reason for this is that manufacturing and agriculture create jobs and increase per capita GDP, and unemployment is one of the most fundamental socio-economic challenges that PNG faces.’

Support

Mikael Ruben, Chief Executive of paint manufacturer AkzoNobel, agrees. ‘In general we think we need support from government to support manufacturing in the country. It is tough to be a manufacturer in PNG.’

The Manufacturers’ Council’s Chey Scovell

Chey Scovell, Chief Executive Officer of the Manufacturing Council of PNG, says that amongst the Oceania countries, PNG is the country that has the ‘highest number of tariff lines that are at zero.’ He says PNG is more liberalised than many countries it trades with.

‘I don’t know that there is any country in the world that doesn’t talk about having some level of assistance for their industry, whether you want to call it assistance, or protection, or support or incentive.

At the end of the day they are all the same thing under different guises.’

Equilibrium

Scovell says one area that is especially problematic is infrastructure. He says the government has invested in improving infrastructure but the benefits will only be seen in the medium to long term.

‘A tariff, albeit relatively small, will be that multiplier for the domestic guys to try and make them more competitive.’

‘You do one part of the road or you do one port it doesn’t reduce the cost of shipping in the whole country.’

Lae Port. Ports are an essential element of PNG’s trade competitiveness.

Scovell says some form of protection ‘is the only thing that can provide some equilibrium to the trading environment, otherwise local businesses are completely at a loss.’

‘A tariff, albeit relatively small, will be that multiplier for the domestic guys to try and make them more competitive. For example, at the moment we have got large volumes of imported beverages, water and carbonated beverages.

Scale

‘You have some people who say that PNG should not have any beverage manufacturing because we can get it from Indonesia cheaper. We don’t have the economies of scale. How is it that a country with 10 million people cannot have economies of scale to support at least three beverages manufacturers?

‘PNG was a net exporter until Indonesia provided a ‘massive subsidy’ to bottlers of oil and a big excise on bulk exports.

‘Of course we have economies of scale in the market here, but in Indonesia you can get your electricity for between US 3 and US 12c a kilowatt hour, while here you are paying US 40-50 cents. Their transportation is so much cheaper. They get a subsidy on their exports. It is all stacked in their favour to get export markets cheaply.’

PACER Plus

Scovell says the PACER Plus agreement permits PNG to nominate industry sectors that can receive protection should market circumstances warrant it. He says it is a better vehicle than the anti-dumping facilities in the World Trade Organisation (WTO).

A statement from the Office of the Chief Trade Adviser, says the PACER Plus agreement allows participating countries to ‘modify or withdraw’ tariff commitments, use ‘traditional safeguard measures’ to deal with import surges and use an ‘infant industry’ clause to increase tariffs in emerging sectors.

Oil palm seedlings. Credit: R H Group

Scovell says an example of the potential distortions that can occur is what has happened with palm oil. PNG, he says, was a net exporter until Indonesia provided a ‘massive subsidy’ to bottlers of oil and a big excise on bulk exports.

‘In the space of a few months the Indonesians took up 80 per cent of the PNG market. We used to have nine bottlers of domestic oil domestically. Now we have two.

‘Because Indonesia is giving a subsidy to people who export the finished product the Indonesian producers can actually pay off their capital investment in maybe five or six months just on the subsidy alone.

‘So it is reasonable that we will have the right to say that if Indonesia is going to do that, then we will put in a 20 per cent tariff on the subsidised oil that comes in. Because they are really selling it to us at below the cost of production.’

Read Michael Kingston’s opinion piece on protectionism here.